Itaú BBA - Weekly Fixed Income LatAm Strategy: Stay received in Brazil despite the rally

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Weekly Fixed Income LatAm Strategy: Stay received in Brazil despite the rally

March 5, 2018

We will maintain our DI Jan21 receivers because we think the yield curve is still too steep.

Brazil: Last week saw another rally in local DI rates, as the market continues to (1) revise the inflation path downwards; (2) increase the odds of another 25-bp cut in March; (3) lower expectations of rate hikes by the end of 2018 and 2019; and (4) reduce the paying pressure on longer-maturity rates after the government revoked resolution 4.444 (pension funds). Our receiver position in DI Jan21 is enjoying a 1.24% gain and we will keep it because we still believe the curve is too steep.

This week’s highlights will be a CNT/MDA poll of voting intentions for the 2018 Presidential race (from Monday onwards), January’s industrial production (Tuesday; Itaú: -2.6% mom/sa) and February’s IPCA inflation on Friday. For the latter, we forecast 0.35% gain, with the 12-month reading broadly stable at 2.9%. It will be especially important to monitor the trend of core inflation (services and industrial goods), which declined significantly in January, to assess whether the Copom might opt for another 25-bp cut in its March meeting.

Colombia: The front-end of IBR curve has been relatively stable, as the market still hasn’t priced in that Banrep will cut rates again. In its last policy meeting, Banrep argued that the easing cycle had ended, but since then unofficial communication has been more dovish, with members stating that if inflation declines considerably, they may opt for more easing.

This week’s highlight is February’s CPI (Monday). We expect a 0.75% monthly gain, taking the twelve-month reading to 3.4% (prior: 3.7%), a level that is already close to the one we believe Banrep would engage in additional easing. We believe Banrep will cut rates again in its March or April meeting, and continue to receive outright the 18-month IBR rate (current P&L: -0.09%).

Mexico: Last week Banxico published the first quarterly inflation report of the year, with a greater emphasis on the role that inflation forecasts will play in the board’s decisions. The central bank continues to put less emphasis on the Fed, indicating the board is not willing to react to the likely Fed’s rate hike in March. With inflation falling and GDP growth around potential, we believe Mexico’s policy rate will normalize ahead. We continue to receive the 3y rate, and pay the 1y rate (current P&L: +0.11%) to hedge against the risk factors (NAFTA renegotiation and elections), which if triggered could cause further rate hikes.

This week’s highlight is February’s CPI, on Thursday, for which we expect a 0.40% increase taking the 12-month reading to 5.35% from 5.55% in January. We forecast inflation to continue slowing down to 3.7% by year-end.

Peru: The Central Bank will hold its monthly meeting on Thursday to decide on the reference rate. With annual inflation decreasing further in February (to 1.2%, from 1.3% in January) – approaching the lower bound of the tolerance range around the 2% target – and surprisingly weak activity data (GDP proxy grew 1.3% year-over-year in December below market expectations of 2%), we believe the board will cut the reference rate by 25bps (to 2.75%).

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